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How Pandora Is Beating Apple’s iTunes Radio

When rumors of Apple’s (AAPL) online radio service first leaked last year, shares of market leader Pandora Media (P) took a dive. But the reality of Apple’s iTunes Radio has been much less damaging for Pandora, at least so far. Pandora shares hit a new all-time high of $28.36 during trading on Nov. 12 before closing at $28.24. With all of Apple’s popularity and marketing might, how can that be?

iTunes Radio is attracting mostly less valuable, casual listeners

Online radio, like regular terrestrial radio, is mainly an advertising play. And that means the more hours a user listens, the more valuable that user is to Pandora. So it’s good news for the company and its shareholders that the audience for iTunes radio appears to be drawn mainly from the more casual segment of the audience.

Apple has said 20 million customers listened to 1 billion hours of music in the first month after its new service went online. After modeling the growth rate in iTunes Radio usage, analyst Sameet Sinha at B. Riley & Co. estimates each user tuned in for about 9.5 minutes per day. Pandora listeners average 38.5 minutes, Sinha estimates.

“Our analysis indicates that even early adopters and Apple fans are not engaging with iTunes Radio at high levels,” Sinha wrote in a recent research report.

Pandora’s most recent monthly listener report showed the number of active users declined to 70.9 million in October from 72.7 million in September. But the number of hours listened rose to 1.47 billion from 1.36 billion. A million or two listeners may have defected but they weren’t listening that much, as the total number of hours still increased.

Pandora’s apps have superior playlist making talent

One reason that hardcore Pandora listeners have not defected could be due to the company’s proprietary system for choosing which tracks to play. Pandora’s algorithm combines information about what music customers liked (the common “people who liked this also liked that” formula) with data analyzing the musical characteristics of different songs. The combination makes for more appealing playlist recommendations.

Pandora’s strength shows up in customer satisfaction surveys, Paul Verna, senior analyst at eMarketer, notes. “Even for a company like Apple, it’s a much higher mountain to climb if customers are satisfied with what they already have,” he says.

Apple hasn’t said exactly how its music selection algorithm works. And the company's last escapade to aid music selection in iTunes was left to wither and die. Apple does have the advantage of a much larger catalog of music to draw from than Pandora but thus far that doesn’t appear to have lured away many Pandora users.

People don’t want to own all their favorite song anymore

One of iTunes Radio’s cool features is a button that lets listeners buy any track they hear from Apple’s iTunes store with just a click. But listeners are increasingly less interested in buying and owning their favorite music. Sales of digital singles dropped 6% in the third quarter from last year and are down 3% for 2013 so far, according to Nielsen SoundScan. Meanwhile streaming volume is up 24%.

“Young people today don’t buy music anymore,” says Martin Pyykkonen, an analyst at Wedge Partners. The iTunes Radio app “is so predicated on trying to get people to buy more music.”